Corporate Finance Plus MyLab Finance with Pearson eText -- Access Card Package (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
4th Edition
ISBN: 9780134408897
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Chapter 15, Problem 27P
PMF, Inc., is equally likely to have EBIT this coming year of $10 million, $15 million, or $20 million. Its corporate tax rate is 35%, and investors pay a 15% tax rate on income from equity and a 35% tax rate on interest income.
- a. What is the effective tax advantage of debt if PMF has interest expenses of $8 million this coming year?
- b. What is the effective tax advantage of debt for interest expenses in excess of $20 million? (Ignore carryforwards.)
- c. What is the expected effective tax advantage of debt for interest expenses between $10 million and $15 million? (Ignore carryforwards.)
- d. What level of interest expense provides PMF with the greatest tax benefit?
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Assume that CVC Corp.'s marginal tax rate is 35%, investors in CVC pay a 15% tax rate on income from equity and a 35% tax rate on interest income. CVC is equally likely to have EBIT this coming year of $20 million, $25 million, or $30 million. What is the effective tax advantage of debt if CVC has interest expenses of $8 million this coming year?
2. An overview of a firm's cost of debt
To calculate the after-tax cost of debt, multiply the before-tax cost of debt by (1-T).
Western Gas & Electric Company (WGC) can borrow funds at an interest rate of 11.10% for a period of six years. Its marginal federal-plus-state tax
rate is 25%. WGC's after-tax cost of debt is 8.32% (rounded to two decimal places).
At the present time, Western Gas & Electric Company (WGC) has 10-year noncallable bonds with a face value of $1,000 that are outstanding. These
bonds have a current market price of $1,495.56 per bond, carry a coupon rate of 10%, and distribute annual coupon payments. The company incurs a
federal-plus-state tax rate of 25%. If WGC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to
two decimal places)? (Note: Round your YTM rate to two decimal place.)
2.94%
2.35%
2.65%
3.38%
Suppose a firm's tax rate is 25%.
a. What effect would a $9.05 million operating expense have on this year's earnings? What effect would it have on
next year's earnings?
b. What effect would a $10.2 million capital expense have on this year's earnings if the capital expenditure is
depreciated at a rate of $2.04 million per year for five years? What effect would it have on next year's earnings?
a. What effect would a $9.05 million operating expense have on this year's earnings? What effect would it have on
next year's earnings? (Select all the choices that apply.)
A. A $9.05 million operating expense would be immediately expensed, increasing operating expenses by $9.05
million. This would lead to a reduction in taxes of 25% x $9.05 million = $2.26 million.
B. A $9.05 million operating expense would be immediately expensed, increasing operating expenses by $9.05
million. This would lead to an increase in taxes of 25% × $9.05 million = $2.26 million.
C. Earnings would decline by $9.05…
Chapter 15 Solutions
Corporate Finance Plus MyLab Finance with Pearson eText -- Access Card Package (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
Ch. 15.1 - With corporate income taxes, explain why a firms...Ch. 15.1 - Prob. 2CCCh. 15.2 - With corporate taxes as the only market...Ch. 15.2 - How does leverage affect a firms weighted average...Ch. 15.3 - How can shareholders benefit from a leveraged...Ch. 15.3 - How does the interest tax shield enter into the...Ch. 15.4 - Prob. 1CCCh. 15.4 - How does this personal tax disadvantage of debt...Ch. 15.5 - How does the growth rate of a firm affect the...Ch. 15.5 - Do firms choose capital structures that fully...
Ch. 15 - Prob. 1PCh. 15 - Grommit Engineering expects to have net income...Ch. 15 - Suppose the corporate tax rate is 40%. Consider a...Ch. 15 - Braxton Enterprises currently has debt outstanding...Ch. 15 - Your firm currently has 100 million in debt...Ch. 15 - Arnell Industries has just issued 10 million in...Ch. 15 - Prob. 7PCh. 15 - Prob. 8PCh. 15 - Safeco Inc. has no debt, and maintains a policy of...Ch. 15 - Rogot Instruments makes fine violins and cellos....Ch. 15 - Rumolt Motors has 30 million shares outstanding...Ch. 15 - Summit Builders has a market debt-equity ratio of...Ch. 15 - NatNah, a builder of acoustic accessories, has no...Ch. 15 - Restex maintains a debt-equity ratio of 0.85, and...Ch. 15 - Acme Storage has a market capitalization of 100...Ch. 15 - Milton Industries expects free cash flow of 5...Ch. 15 - Prob. 17PCh. 15 - Kurz Manufacturing is currently an all-equity firm...Ch. 15 - Rally, Inc., is an all-equity firm with assets...Ch. 15 - Prob. 20PCh. 15 - Facebook, Inc. had no debt on its balance sheet in...Ch. 15 - Markum Enterprises is considering permanently...Ch. 15 - Garnet Corporation is considering issuing...Ch. 15 - Suppose the tax rate on interest income is 35%,...Ch. 15 - With its current leverage, Impi Corporation will...Ch. 15 - Colt Systems will have EBIT this coming year of 15...Ch. 15 - PMF, Inc., is equally likely to have EBIT this...
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